Trusts

Question 1

Support trust

Answer 1

In a support trust, the trustee is required to apply so much of the trust as is necessary for the beneficiary’s support; the trustee does not have discretion to refuse to pay those bills.

Question 2

Discretionary trust

Answer 2

Ina discretionary trust, the trustee is given discretion whether to apply or withhold payment of trust property to the beneficiary. The beneficiary cannot interfere with the exercise of the trustee’s discretion unless the trustee abuses her power. Generally, a court will not interfere unless the trustee has acted in bad faith or dishonestly. If absolute and unreviewable discretion is conferred upon the trustee, court interference is unlikely.

Question 3

Termination of a trust by beneficiaries

Answer 3

Most jurisdictions permit termination of a trust by its beneficiaries only if all of the beneficiaries consent and the modification will not interfere with a material purpose of the trust. Most states do not permit a guardian to consent to the termination of a trust on behalf of unborn beneficiaries. The presence of a spendthrift provision precludes the termination of a trust because it shows the settlor’s material purpose and manifests his lack of confidence in the judgment and management ability of the beneficiary. If the settlor were to join in the request for termination, the material purpose will be waived.

Question 4

Termination of a trust by the court

Answer 4

A court can terminate a trust prior to the time fixed in the instrument if the trust purposes are accomplished early or the trust purposes become illegal or impossible to carry out.

Question 5

Valid trust requirements

Answer 5

To create a valid trust, there must be a settlor who, intending to create a trust for a valid trust purpose, delivers the trust property to the trustee to hold for the benefit of one or more beneficiaries. A settlor’s promise to create a trust in the future is valid only if:

1. supported by consideration, or
2. he manifests anew an intention to create the trust when the assets come into existence.

Question 6

Pour-over gift from a will

Answer 6

Under the traditional view, to create a valid pour-over gift from a will to a revocable trust, the trust must be in existence or must be executed at the time of the will’s execution. Under the prevailing view, the trust may be established after the will is executed but before the testator’s death. Pour-over gifts are valid even if the trust is unfunded or amended during the testator’s lifetime.

Question 7

Spendthrift trust

Answer 7

A spendthrift trust prohibits the beneficiary from voluntarily or involuntarily transferring his interest in the trust. A settlor-beneficiary cannot protect his own interests from creditors by a spendthrift provision.

Question 8

Can a settlor retain full control of trust assets and income during his lifetime and make future additions to the trust?

Answer 8

A trustee holds legal title to specific property under a fiduciary duty to manage, invest, safeguard, and administer the trust assets and income for the benefit of designated beneficiaries. If Settlor wishes to retain full control of trust assets, he should name himself as trustee. Under the Uniform Trust Code, an inter vivos trust is revocable unless expressly made irrevocable. In the states that follow the common law rule, a trust is irrevocable unless the instrument expressly states otherwise. Generally, a trustee’s duties cannot be enlarged after he has accepted. However, the power to revoke includes the power to amend.

Question 9

Power of appointment

Answer 9

A power of appointment is an authority created in a donee enabling the donee to designate, within the limits prescribed by the donor of the power, the persons who shall take certain property and the manner in which they shall take it. A general power of appointment is exercisable in favor of the donee, her estate, her creditors, or the creditors of her estate. A special power of appointment, on the other hand, is exercisable in favor of a specified class of persons that does not include the donee, her estate, her creditors, or the creditors of her estate. A testamentary power is one that is exercisable only by the donee’s will.

Question 10

Anti-lapse statute

Answer 10

Where a remainder interest is conditioned on a beneficiary’s surviving the settlor and the beneficiary does not meet the condition, his interest fails. Nearly all states have anti-lapse statutes that operate to save a gfit to a predeceasing beneficiary if the beneficiary was in a specified degree of relationship to the testator and left surviving descendants. Because most states apply the anti-lapse statute only to testamentary gifts, it is not applicable here. The UPC and several states apply the anti-lapse statute to future interests created in trusts (even those conditioned on survival). In UPC states, the anti-lapse statute would apply.

Question 11

Ascertainable beneficiaries

Answer 11

Beneficiaries need not be identified at the time a trust is created, but must be susceptible of identification by the time their interests are to come into enjoyment. The trust beneficiaries may be a class, provided that the class is sufficiently definite. the settlor can give the trustee discretion to select class members as long as the class is reasonably definite; if it is too broad, the trust (or a portion thereof) will be invalid.

Question 12

Does a remainder beneficiary’s judgment creditor have a right to immediate payment from the trust?

Answer 12

In the absence of a statutory prohibition or a spendthrift clause, the interest of an insolvent beneficiary can generally be reached to satisfy the claims of his creditor. However, the creditor reaches only the interest of the beneficiary and not the trust property itself.

Question 13

Cy pres doctrine

Answer 13

The cy pres doctrine applies when a specific charitable purpose indicated by the settlor is no longer possible or practical, and the settlor manifested a general charitable intent. In states following the UTC, general charitable intent is presumed and application of cy pres is mandatory. The court can direct that the trust property be applied to another charitable purpose as close as possible to the original one, rather than permit the trust to fail and become a resulting trust.

Question 14

Class gifts - child born after trust created

Answer 14

When a gift is made to a class of persons, the class closes when some member of the class can call for a distribution of her share of the class gift.

Question 15

Class gifts - predeceasing class member

Answer 15

Survival of a class member until the time of closing is usually not required to share in a future gift, but the express terms of the trust control.

Question 16

Beneficiary disclaimer

Answer 16

A beneficiary of a trust has the right, within a reasonable time after learning of the trust, to disclaim the beneficial interest, absent some act of expressed or implied acceptance. Upon disclaimer, any interest that otherwise would pass to that person under the trust passes as though the disclaiming party predeceased the life tenant. In most states, a disclaimer is not effective unless it is in writing and is filed within nine months of the decedent’s death

Question 17

Trustee’s duty to diversify assets - Settlor’s directions contradict

Answer 17

There is a basic duty to preserve and protect the trust corpus. The duty to preserve and protect includes the duty to make trust property productive, which includes the duty to invest. The trustee must exercise reasonable care with respect to the trust property, which means investing trust funds within a reasonable time and selling and reinvesting as needed. Under the UPIA, the trustee must invest and manage trust assets as a prudent investor would, taking into account the purposes, terms, distribution requirements, and other circumstances of the trust. To act prudently, the trustee must exercise reasonable care, skill, and caution. Prudence is evaluated as to overall portfolio, and the trustee has a duty to diversify investments unless there are special circumstances indicating the trust purposes would be better served without diversification. If there is more than one beneficiary, the trustee generally must act impartially in managing the trust assets, taking into account the beneficiaries’ differing interests. When the trust is revocable, the settlor is treated as the owner of the trust assets, and the trustee’s duties are owed to the settlor.

Question 18

Trustee’s fiduciary duties for discretionary trust

Answer 18

A trustee has a fiduciary duty to exercise her powers in accordance with the terms of the trust; failure to do so constitutes a breach of trust. In addition, the trustee has a duty to act prudently, diligently, and in good faith. In a discretionary trust, a beneficiary cannot interfere with the exercise of the trustee’s discretion unless the trustee abuses her power. What constitutes abuse depends on the extent of discretion conferred on the trustee. Even if the trustee’s discretion is absolute, a court will interfere if the trustee acts in bad faith or dishonestly.

Question 19

Trustee’s duty of loyalty

Answer 19

A trustee owes a duty of undivided loyalty to the trust and its beneficiaries. Absent court approval or a contrary trust provision, a trustee cannot enter into any transaction witht e trust (i.e., no self dealing). A trustee may not purchase any property owned by the trust even if she pays full value. A self-dealing trustee’s good faith or benefit to the trust is irrelevant. If a prohibited transaction takes place, the beneficiaries may:

1. set aside the transaction,
2. recover the profit made by the trustee, or
3. ratify the transaction.

Question 20

Termination of trust - trustee’s duties

Answer 20

Upon termination of a trust, the trustee must distribute the property in accordance with the terms of the trust. If the named beneficiary no longer exists and there is no alternate provision, a resulting trust arises in which the settlor is the beneficiary.

Question 21

Rule Against Perpetuities

Answer 21

Under the common law Rule Against Perpetuities, a gift must vest or fail within 21 years after a life in being. Under the modified wait and see approach to the Rule, the validity of events is judged by actual events as they happen. The class must close within the perpetuities period for the gift to be valid. Under the rule of convenience, when the will makes a class gift but postpones the time of possession and enjoyment of the gift, the class closes at the time fixed for distribution.

Question 22

Trustee’s duty to perform personally

Answer 22

A trustee has a duty to perform her trust duties personally. Traditionally, this meant that the trustee could not delegate investment decisions. Under modern statutes, however, a trustee may delegate investment and management functions that a prudent trustee of comparable skills could properly delegate under the circumstances. When delegation is proper, the trustee must exercise reasonable care, skill, and caution in selecting the agent, establishing the scope of the delegation, and periodically reviewing the agent’s actions to monitor the agent’s performance and compliance with the terms of the delegation. If a trustee improperly delegates her duties, she becomes a guarantor of the fund. The trustee’s motives or the fact that the loss was not directly caused by the abdication of control will not be considered by the court. Delegation of certain discretionary functions, such as making discretionary distributions, usually is not permissible.

Question 23

Reformation/modification of a trust

Answer 23

In most jurisdictions, a trust may be modified by the beneficiaries if all beneficiaries consent and the modification will not interfere with a material purpose of the trust. At common law, a court may authorize or direct a trustee to deviate from the administrative terms of a trust (including permitting acts that are forbidden by the trust instrument( if the settlor did nto know or anticipate the new circumstances and compliance with the terms of the trust would defeat or substantially impair accomplishment of the trust purposes.
Under the UTC, court sanctioned modification can be sought if the trust could have been modified if all beneficiaries had consented and the interests of any nonconsenting beneficiaries were adequately protected. To carry out the settlor’s primary intent, which is the welfare of the beneficiaries, the court may ignore a specific discretion of the settlor and grant the trustee powers specifically prohibited in the trust instrument.

Question 24

Changing beneficial rights of beneficiaries

Answer 24

Usually, the doctrine of changed circumstances cannot be used to change the beneficial rights of the beneficiaries. Many states give the court the power to invade principal for an income beneficiary if the court finds that support fo the income beneficiary was the primary purpose of the trust. Under the UTC, the restriction against changing the beneficiaries’ rights does not exist; thus, if unanticipated circumstances threaten the purposes of the trust, the court will permit modification.